Many employees solely focus on their net income and taxes, which is understandable since it puts perspective on the take-home pay. However, it’s crucial to understand the other deductions on your payslip. These are often statutory, meaning employers are legally required to remit them to specific institutions.
1. The National Housing Fund (NHF): Owning Your Dream Home
The National Housing Fund (NHF), established in 1992, is a government initiative designed to make owning a home in Nigeria more accessible. It works by collecting a 2.5% contribution from your monthly basic salary, which is then deposited with the Federal Mortgage Bank of Nigeria. These contributions are pooled together to create a fund used to provide low-interest housing loans to Nigerians.
However, recent changes offer more flexibility. The February 2023 Business Facilitation Act allows private-sector employees to opt out of NHF contributions. This is particularly beneficial for those who may already have alternative homeownership plans or whose current income doesn’t allow for additional deductions. Additionally, employees currently earning the minimum wage (now N30,000) are automatically exempt from contributing.
Whether you choose to participate or not, understanding the NHF is crucial. If homeownership is a future goal, NHF contributions can significantly benefit you by providing access to affordable loans with attractive interest rates. Remember, you can always opt back in later if your circumstances change. It’s important to weigh your options and make informed decisions about your financial well-being.
2. Pension Fund
The Pension Fund, established by the Pension Reform Act of 2004, is a crucial program designed to ensure your financial security after retirement. Here’s how it works:
You, the employee, contribute 8% of your monthly salary, while your employer contributes a minimum of 10%. This combined contribution (minimum 20%) is automatically deducted from your paycheck.
These contributions are deposited into your own Retirement Savings Account (RSA), managed by a licensed Pension Fund Administrator (PFA). The PFA invests these funds on your behalf, aiming for long-term growth to maximize your retirement savings.
Eligibility: Only companies with a minimum of 15 employees are required to participate in the Pension Fund scheme. This ensures a wider safety net for Nigerian workers in the formal sector.
The Pension Fund offers a sense of security. Knowing you’ll have a steady income stream after retirement provides peace of mind. Additionally, you have some control over your PFA selection. You can research different PFAs to find one that aligns with your investment goals and risk tolerance.
Remember, the earlier you start contributing, the more time your savings have to grow through compound interest. Don’t underestimate the power of consistent contributions – they can significantly impact your future financial well-being.
3. The National Health Insurance Scheme
Established to make healthcare accessible and affordable for Nigerians, the National Health Insurance Scheme (NHIS) offers peace of mind for you and your family. Here’s how it works:
- Employer Participation: The NHIS applies to companies with at least 10 employees. These employers contribute 10% of your monthly basic salary towards the scheme.
- Shared Responsibility: You, the employee, contribute 5% of your monthly basic salary. This combined contribution (15%) goes towards a pool for healthcare expenses.
- Family Coverage: The NHIS offers comprehensive coverage for you, your spouse, and up to four biological children under 18 years old. This ensures your entire family receives necessary medical care without financial burden.
- Accessing Healthcare: You access healthcare services through a network of accredited Health Maintenance Organisations (HMOs). These HMOs provide a variety of healthcare services based on the NHIS package you choose.
The NHIS plays a vital role in reducing financial barriers to healthcare. By contributing a small portion of your salary, you gain access to essential medical services, promoting preventative care and overall well-being for yourself and your loved ones.
4. Personal Income Tax
Ever wondered where a portion of your salary goes after deductions? A part of it likely contributes to Personal Income Tax (PIT), a crucial aspect of the Nigerian tax system. Here’s a breakdown:
Legal Framework: The Personal Income Tax Act (2011) and Finance Act (2020) govern PIT. These legislations outline tax brackets, exemptions, and how much you owe based on your income.
Your residency status in Nigeria plays a role. The state you live in determines which government receives your tax remittance. This ensures fair distribution of tax revenue for public services.
Taxable Income: Not all your income is taxed. The taxable income is your gross income (total earnings) minus exemptions outlined by law. These exemptions can include contributions to your Pension Fund, National Housing Fund, and National Health Insurance Scheme, among others.
Understanding PIT is essential. It contributes to the development of Nigeria’s infrastructure, social programs, and overall well-being. By paying your fair share, you’re actively involved in the nation’s progress. Additionally, knowing the exemptions allows you to optimize your tax deductions and potentially reduce your tax liability.
5. The Industrial Training Fund (ITF)
Established in 1971, the Industrial Training Fund (ITF) plays a crucial role in promoting skills development within the Nigerian workforce. Here’s how it functions:
The ITF aims to bridge the skills gap by encouraging companies to invest in employee training. It achieves this by requiring employers with at least 5 employees and a yearly turnover exceeding N50 million to contribute 1% of their annual payroll to the fund.
Shared Responsibility: The ITF operates under a contributory model. While employers contribute 1%, the onus of utilizing these funds for training lies with them. This empowers companies to identify specific skills gaps within their workforce and choose relevant training programs.
Maximizing Resources: Interestingly, employers can get a 50% refund on their contributions. To qualify for this refund, they need to provide proper documentation proving that they used the funds for approved training programs for their employees.
The ITF offers a win-win situation. Companies benefit from a more skilled and qualified workforce, leading to increased productivity and efficiency. Employees gain valuable skills that enhance their employability and career prospects. Ultimately, the ITF contributes to a stronger and more competitive Nigerian industrial sector.
Employers can explore available training programs to upskill their workforce and potentially claim a refund. Employees can enquire about training opportunities offered by their companies to enhance their professional development.
6. Nigerian Social Insurance Trust Fund (NSITF)
Established in 2010, the Nigerian Social Insurance Trust Fund (NSITF) offers a vital safety net for Nigerian employees in the unfortunate event of work-related injuries or death. Here’s how it functions:
- Employer Contribution: Your employer contributes 1% of your monthly salary to the NSITF. This contribution goes towards a pool of funds used to compensate employees or their dependents.
- Compensation for Work-Related Incidents: The NSITF provides financial assistance in cases of work-related accidents, injuries, occupational diseases, or even death arising from performing your job duties. This financial aid helps alleviate the financial burden on employees and their families during a difficult time.
Knowing that the NSITF exists can provide peace of mind for both employees and employers. Employees can focus on their work with the assurance of some financial support in case of unforeseen circumstances. Employers, on the other hand, can fulfil their legal obligation to provide a safe work environment while knowing there’s a system in place to offer some form of compensation.
It’s important to note that the NSITF is completely funded by employer contributions, with no deduction taken directly from your salary. However, understanding the program allows you to be aware of the benefits available and the process for claiming compensation if needed. In the unfortunate event of a work-related incident, you or your dependents can approach the NSITF for guidance and potential financial assistance.
